Markets expect more of the same from Bernanke

Federal Reserve Chairman Ben Bernanke Wednesday spoke to Congress about unwinding policy, and for the first time in awhile his "taper talk" didn't make waves in markets.

Traders expect more of the same Thursday when Bernanke appears before the Senate Banking Committee to give his semi-annual address on the economy for a second day.

Bernanke testified before the House Financial Services Committee Wednesday and reinforced the message that he has been communicating for several months – that the time to cut back on the Fed's $85 billion monthly bond purchases is getting close. He also reiterated that "tapering" the bond purchases will depend on the economy, and tapering does not mean the Fed will move to raise short term interest rates.

The Fed chairman also emphasized that there's no pre-set plan, and that the time between the end of asset purchases and a rate hike could be considerable. He also made it clear that the targets the Fed is watching for rate hikes – including a 6.5 percent unemployment rate – are simply targets, not "triggers."

"It's probably the first time he didn't cause some kind of adverse or outlier reaction, or add some volatility to the markets," said Zane Brown, fixed income strategist at Lord Abbett. Treasury yields moved lower, just below 2.50 percent on the 10-year but traders said weak housing starts data also sent buyers into bonds.

The Dow finished up 18 at 15,470, after moving in a relatively narrow 64 point range, and the S&P 500 was up 4 to 1680.

"I think we're kind of exhausted on the topic of Fed policy, and maybe we're coming to terms with the fact we're not going to know until the next Fed meeting what they're going to do. He's not giving us any new information so the market has accepted the idea that the Fed is going to taper," said Gina Martin Adams, institutional equities strategist at Wells Fargo Securities.

Bernanke, himself, acknowledged the markets misunderstood his earlier "taper" talk, but he said that has changed. "I think the markets are beginning to understand our message and the volatility has obviously moderated," he told the House panel. Markets generally expect the Fed to cut back its purchases in the fourth quarter since Bernanke said it could be before year end, and many expect the Fed to act in September.

As Fed officials discussed tapering, Treasury yields have made some fairly dramatic moves since early May, when the 10-year was yielding 1.62 percent. Last week, it was yielding 2.75 percent after a stronger than expected employment report.

J.P. Morgan economist Michael Feroli pointed out in a note that Bernanke was less upbeat Wednesday on the economy than the Fed sounded after its June meeting.

"Bernanke's assessment of the growth situation was more downbeat than the message coming out of the last FOMC, as he noted the jobs situation is "far from satisfactory," due to, among other factors, high rates of underemployment. Regarding the overall economy, he duly noted the Committee's assessment that downside growth risks have diminished, much as he did after the June FOMC meeting. However, he then went on to offer that fiscal drags could be more than the Fed expects, global growth could be less than expected, and more generally that the slow pace of growth leaves the economy "vulnerable to unanticipated shocks," he wrote.

Bernanke's comments in Boston last week sent stocks flying, while his post-meeting comments last month and earlier testimony before the Joint Economic Committee in May sent rates higher and stocks reeling on concerns about "tapering."

Brown said the concerns the economy is not strong enough to withstand tapering have not gone away, especially with recent data like Wednesday's housing starts. Starts fell nearly 10 percent, the worst since August.

What to Watch

"We're going to be watching Bernanke again tomorrow," said Art Hogan of Lazard Capital Markets. "I think we get some more Fed focus. I think these two days are the fulcrum point. I think the message has been clearly delivered."

"It's frustrating that earnings are taking a back seat to what we already know," Hogan said.

Traders will also be watching earnings news, including the reaction to some of Wednesday's reports. IBM for instance was higher on its report after the bell Wednesday, while Intel sank after its earnings.